The Inheritance Tax rules can be difficult to fathom when an expat or another person with connections to the UK living outside the country dies. The liability to Inheritance Tax in the UK depends primarily on the domicile of the deceased. If the deceased is deemed to be domiciled in the UK for tax purposes, they will generally be subject to Inheritance Tax in the UK regardless of where they died. It is important to note that this is different to being classed as a non-resident for tax purposes.
HMRC will treat any person who has been resident in the UK for more than 15 of the previous 20 years as deemed domiciled in the UK for tax purposes. The deceased will also be treated as being domiciled in the UK if they had their permanent home in the UK at any time in the last 3 years of their life.
If the deceased has a non-UK domicile, then Inheritance Tax is only paid on any UK based assets such as property or bank accounts in the UK. Inheritance Tax would not be payable on ‘excluded assets’ like foreign currency accounts, overseas pensions and holdings in authorised unit trusts and open-ended investment companies.
This a complex area and professional advice should be taken to minimise any liability to Inheritance Tax in the UK if someone is living abroad. The rules can also mean that there is a liability to Inheritance Tax in more than one jurisdiction and that double taxation treaties need to be carefully considered. Failure to take into Inheritance Tax planning into account could lead to a greatly increased tax liability.